REPEATED EFFORTS TO MODERNIZE PAPER
TAX RETURN PROCESSING HAVE BEEN UNSUCCESSFUL; HOWEVER, ACTIONS CAN BE TAKEN TO
INCREASE ELECTRONIC FILING AND REDUCE PROCESSING COSTS

Issued on September 10, 2009

Highlights

Highlights of
Report Number: †2009-40-130 to the
Internal Revenue Service Commissioner for the Wage and Investment Division.

IMPACT ON TAXPAYERS

In
Calendar Year 2008, the Internal Revenue Service (IRS) received 156.3 million
individual income tax returns of which 66.4 million (42.5 percent) were
paper-filed.† The IRS has devoted
significant resources to identify ways it could modernize its method for
processing paper tax returns but has had no success.† Actions can be taken including mandating
electronic filing (e-filing) for paid
preparers and developing processes to convert paper returns into an electronic
format which would significantly reduce paper filings, processing costs, and
error rates, with the added benefit of faster tax refunds and more accurate tax
returns for taxpayers.

WHY TIGTA DID THE AUDIT

This
audit was initiated to assess the IRSí strategy to convert paper-filed
individual income tax returns into an electronic format.† The IRS continues to receive large numbers of
paper-filed individual income tax returns despite a continued growth in e-filing.† Processing of paper-filed tax returns costs
the IRS approximately $190.6 million.

WHAT
TIGTA FOUND

Repeated
efforts have been initiated to modernize paper tax return processing with no
success.† Significant resources have been
expended on developing modernization concepts.†
Since at least as far back as 1988, the IRS has attempted to develop a
system to replace its current paper tax return processing.† However, these efforts have resulted in
little more than conceptual visions.

While
the IRS has not been able to move beyond the conceptual stage for modernizing
paper processing, there are actions that would reduce paper filings and/or
convert paper tax returns into an electronic format.†

These
options could result in a significant increase in e-filing as well as significant processing cost savings to the
IRS.† The options are:

∑Mandate e-filing for paid preparers (this option
would require a change in the law).† The
majority of paid preparers are already familiar with operating in an electronic
environment.† Most paid preparers who
filed paper tax returns actually used an electronic tax software preparation
package and 70 percent also e-filed
at least 1 tax return, which indicates a familiarity with the electronic
preparation and e-filing process.

∑Convert
residual paper returns into an electronic format.† Updating the Modernized Submission Processing
concept to include pursuing successful processes followed by States that use
scanning technology could provide the IRS with an option to convert paper-filed
tax returns into an electronic format, thereby reducing processing costs
associated with paper-filed tax returns.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the Commissioner, Wage and Investment Division, pursue
implementing successful processes followed by States that use scanning
technology (Optical Character Recognition and Two-Dimensional Bar Codes) to
convert paper-filed tax returns prepared by individuals using a tax preparation
software package into an electronic format. †TIGTA also made a legislative recommendation
to consider mandating e-filing for
all paid preparers.

In
their response to the report, IRS officials agreed with the recommendations.† The Wage and Investment Division plans to
pursue the implementation of processes that use scanning technology (Optical Character
Recognition and Two-Dimensional Bar Codes). †Two-Dimensional Bar Codes will be a project
proposal for the 2012 Modernization Vision and Strategy planning cycle. †In the meantime, the IRS plans to submit a new
proposal to enhance legacy systems with Two-Dimensional Bar Code capabilities. †The IRS also agreed with the legislative
recommendation and stated that it is currently under consideration by the Department
of the Treasury and included in the President's Fiscal Year 2010 budget
request.

READ THE
FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go to: †